Affordability Tops Concerns as Real Estate Sector Focuses on Supply
The real estate sector is carefully monitoring recent tariff negotiations around steel and rising interest rates, which could further exacerbate affordability issues for Canadians. Developers, investors, lenders and other leading experts are cautiously optimistic about the sector according to the 2019 Emerging Trends in Real Estate report published by PwC Canada and the Urban Land Institute (ULI). However, there is a bright future for flex spaces, PropTech, and seniors’ housing.
Residential Real Estate Land supply is the number one development concern heading into 2019 and the report highlights that all levels of government need to increase their focus on the supply side of the issue, not just demand. Markets like Edmonton and Montréal managed to bring new housing supply into balance with rising prices, but markets like Toronto and Vancouver have yet to do so.
“Dealing with the affordability issue is a shared responsibility between government and developers. While government addressed demand by introducing measures like tighter mortgage rules and foreign taxes, they neglected the supply side,” says Frank Magliocco, National Real Estate Leader, PwC Canada. “Reducing regulation and making more land available for development in a timely manner will help address the affordability issue.”
The proportion of household income needed to service the costs of a single-family home grew to 53.5 per cent in the first quarter of 2018, with Vancouver leading the charge with 119.3 per cent. High housing costs are pushing Canadians, especially millennials, to abandon the dream of owning housing in the city for the suburbs or other markets for more affordable housing.
PropTech revs up with significant investment in funds dealing with the convergence of real estate and technology.
Rising interest rates and higher tariffs on foreign steel are top of mind for developers and owners. For example, tariffs on steel could translate into more expensive input costs for residential and commercial builders, ultimately putting further pressure on affordability.
Commercial Real Estate Co-working spaces or flex office space continue to see an upward trend and are forecasted to make up 30 per cent of corporate real estate portfolios by 2030. “Creating a co-working space isn’t so much about cost as it is building a community and sharing experiences and knowledge between different people and industries,” adds Magliocco.
The multi-family apartment sector continues to be a strong performer but segments of the retail sector are continuing to struggle and are forced to reinvent themselves. The industrial sector continues to perform well and with Canada’s legalization of recreational cannabis is set to provide opportunities across the country as emerging companies look to find industrial space to grow the plant and retail space to sell product.
Senior lifestyle housing supply is among the top development prospects for the next year since Canadians over the age of 65 have surpassed those under the age of 15. In 2017, 31 per cent of Canadians aged 85 and older lived in collective dwellings, which will only grow in upcoming years.
The emergence of PropTech, which covers everything from new lending services to investment platforms and digital brokerages, is changing the way properties are bought, sold and managed. According to the report, PropTech is forecasted to add US$5.2 billion in new investment globally across 454 equity deals in 2018, after reaching a record US$3.4 billion in 2017 across 367 deals. However, only 10 per cent of CEOs in global real estate are concerned about the speed of technological change.
“While the intersection of real estate and technology has been slow until now, we have seen a significant change in interest and focus in the PropTech industry here locally and globally,” adds Magliocco.
Drones were the top real estate disrupter identified in the report. There is potential in using drones to show job-site progress and others are looking to integrate docking stations into communities to accommodate last-mile delivery needs. Autonomous vehicles, cybersecurity and construction technology were also identified as top technology real estate disruptors.
The report also identified other factors such as GDP growth and affordability issues impacting the different real estate markets across Canada. The top five markets to watch in 2019 are: Toronto, Vancouver, Montréal, Ottawa and Québec City.
Expected Best Bets for 2019
Warehousing and Fulfillment — Warehousing and fulfillment represent the top development prospects among survey respondents. With the increased need for last-mile delivery and e-commerce facilities, logistics and fulfillment continue to be a major opportunity for creating value. As tenants look for increasingly larger spaces, vacancy rates are tightening and rents are rising. While the GTA is often an area of focus, development is taking place across Canada, as seen in the recent announcement of a large warehouse facility in Ottawa that will lead to the creation of about 600 full-time jobs. One interviewee mentioned the concept of industrial hoteling to allow companies to temporarily use warehouse space for seasonal needs, such as the holiday rush.
Senior Lifestyle Housing — Among the top development prospects with survey respondents is senior lifestyle housing, which one interviewee described as “a rising tide that can’t be denied.” With the number of Canadians over age 65 having surpassed those under age 15 for the first time in the 2016 census, several interviewees cited the development opportunities for senior lifestyle housing. While the development boom could lead to oversupply in certain markets, such as the GTA, interviewees across Canada predicted that demand would generally be strong. An important factor in driving demand for facilities that cater to seniors’ needs is the growth in the population aged 85 and older. Canadians in that age group also show a strong tendency toward collective dwellings, with 31 percent living in this type of housing in 2017. While demand will be strong, interviewees noted the complexities of investing in such a niche area—one person likened it to a “hotel on steroids”—and emphasized the importance of high-quality, mixed-use housing supply that meets a range of lifestyles.
Multifamily Market — As the cost of entering the housing market makes homeownership an increasing challenge, Canadians will continue to turn to multifamily options as an affordable alternative. The survey results reflect that trend, with respondents citing multifamily homes as a top development prospect. Interviewees also noted the new trend of industrial condominiums. Statistics Canada has been reporting brisk activity for building permits for multifamily dwellings. In fact, it reported a record $3.1 billion in multifamily building permits for May 2018. Interviewees cited multifamily rental prospects as being particularly strong.